Question

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $376,000 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 150,400 units of the equipment’s product each year. The expected annual income related to this equipment follows: Sales: $ 235,000 Costs Materials, labor, and overhead (except depreciation on new equipment): 82,000 Depreciation on new equipment: 62,667 Selling and administrative expenses: 23,500 Total costs and expenses: 168,167 Pretax income: 66,833 Income taxes (40%: 26,733 Net income $ 40,100

If at least a 10% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

n = 6, i = ? Present value of annuity 1 = amt (?) x PV factor (?) PV of Cash Inflows = ? PV of Cash Outflows = ? NPV = ?

Answer 1

First of all we need to find out the net cash flow as under

Sales		235000
Less: cost
Materials, labor, and overhead (except depreciation)	82000
Depreciation on new equipment	62667
Selling and administrative expense	23500
Total costs and expenses		168167
Pretax income		66833
Income taxes (30%		26733
Net income		40100
Add: depreciation		62667
Net cash low		102767

Now we will Compute the net present value of this investment as under

Chart Values are Based on:
n=	6
i =	10%
Year	Cash Inflow	x	PV Factor	=	Present Value
1.-6	102767		4.3553	=	447580.244
Total					447580.244
Less: Initial Investment					$376,000
NPV					$71,580

NPV of this project = $71,580